The Investment Company Act of 1940 (the “1940 Act”) imposes restrictions on the ability of 1940 Act-regulated funds, including business development companies (“BDCs”), to offer multiple share classes with differing expense structures. Although the SEC adopted Rule 18f-3 under the 1940 Act in 1995 to permit mutual funds to issue multiple share classes, the rule is not available to BDCs or registered closed-end funds (“CEFs”). As a result, BDCs and CEFs must seek exemptive relief from the SEC to offer multiple share classes. The process for the receipt of multi-share class exemptive relief for CEFs has become so routine that their multi-class exemptive relief applications are eligible for expedited review and approval under the SEC’s “expedited review procedure for routine applications.” However, there have been, and continue to be, roadblocks and even dead ends to the receipt of multi-class exemptive relief for BDCs.

In 2014, FS Investments, on behalf of its non-traded publicly offered BDC,1 filed an application for the receipt of multi-share class exemptive relief from the SEC. After a five-year period of back-and-forth with the SEC staff, the SEC ultimately granted the requested exemptive relief in 2020. As a result, non-traded publicly offered BDCs can now obtain multi-share class exemptive relief from the SEC, although the SEC staff has still not permitted them to do so on an expedited basis as is the case for CEFs.

In 2022, a number of private BDCs2 filed applications to receive multi-share class exemptive relief. After engaging in rigorous discussions with the SEC staff, these private BDCs were instructed by the SEC staff to withdraw their applications because the SEC had determined that it would not act on the applications, despite the fact that other 1940 Act funds, including mutual funds, CEFs, and non-traded publicly offered BDCs, can issue multiple share classes via Rule 18f-3 or the receipt of multi-share class exemptive relief.

Given the importance for private BDCs of being able to access different distribution channels via the issuance of multiple share classes, we expect that private BDCs will continue to push the SEC to level the playing field on this issue vis-à-vis their other 1940 Act brethren and hope to see regulatory change on this front sooner rather than later.
 

Footnotes

  1. Non-traded publicly offered BDCs conduct continuous public offerings via the filing of a Form N-2 registration statement under the Securities Act of 1933 (the “1933 Act”).
  2. Private BDCs do not publicly offer or sell their shares to the public, but instead do so pursuant to the “private placement” and other exemptions from the registration requirements under the 1933 Act.